The Globalization of Service Activities
by Dave Dougherty
Executive Vice President, Global IMG
Convergys

Offshore outsourcing has become a lightning rod for debate and an election issue. However, the great misconception surrounding this debate is the notion that outsourcing equals offshoring. Competitive sourcing -- or outsourcing -- is not "offshoring." Competitive sourcing is a corporate strategy through which companies make decisions about where, within their global reach, they perform work. Companies outsource as a strategic business decision.

New protectionist measures are being proposed that would reverse decades of progress. Proposed pieces of legislation have such titles as "The USA Jobs Protection Act" and "The Jobs for America Act."

Laws or regulations that have the effect of restricting a U.S. company's ability to competitively source its activities in the best interests of its shareowners, clients, and employees would prevent companies like Convergys from effectively bidding on and competing for new business. This is bad public policy and bad economics. Companies must be free to grow, innovate, and produce quality products and services.

If regulations are put into place that restrict the ability of U.S. firms to provide competitive sourcing for non-core business activities, growth will stagnate and companies like Convergys could lose clients as business moves to foreign competitors. Thus, American jobs could be lost in all industries including telecommunications, finance, and consumer goods.

It is worth remembering that every generation seems to have its bogeyman, which naysayers claim will take jobs away from Americans:

In the early 20th century, it was immigration, which flooded America with workers willing to perform our economy's hard, dangerous work for far less pay than native-born workers; and later it was technology, which had the potential to leave the telegraph office dark in favor of the upstart telephone.

In the 1930s, it was capitalism, which would divide the world into the "haves vs. the have-nots."

By the 1960s, the new job-killer was automation, which so rapidly replaced human labor that experts feared that there would be few jobs left for humans to perform.

In the 1980s, it was Japan -- an economy so disciplined and invulnerable that it would either out- compete us or buy us out or both.

The "job-killer" of our generation is the perceived notion that countless white-collar, professional, high-tech jobs are being -- and will continue to be -- outsourced to offshore locations.

The reality is that offshore outsourcing, far from being a threat to the U.S. economy, is an opportunity to raise American earnings, productivity, and prosperity. It's an opportunity we will squander if we allow protectionist measures to carry the day.

The heart of the argument against competitive outsourcing is that our situation today is fundamentally different from those of generations past. This flies in the face of the lessons learned repeatedly from our economic history -- that open markets and free trade are the source of prosperity, not decline.

The standard case for free trade holds that countries are best off when they focus on sectors in which they have competitive advantage; that is, sectors that have the lowest costs of production. Allowing countries to specialize accordingly increases productivity, translating into cheaper goods and greater variety for all consumers.

Catherine Mann of the Institute of International Economics conservatively estimates that the globalization of U.S. production has boosted the country's GDP by $230 billion over the past seven years; the globalization of IT services should also lead to a large increase. As the price of IT services declines, sectors that have yet to exploit such services to their fullest -- such as construction and health care -- will begin to do so, thus lowering their cost of production and improving the quality of their output. Foreign facilities boost demand for U.S. products including computers and telecom equipment necessary for the performance of the outsourced function.

Outsourcing also has non-economic benefits. Some of the countries where U.S. firms have set up outsourcing operations -- including India, Poland, and the Philippines -- are vital allies in the war on terrorism. Additionally, as discussed in the recent New York Times/ Discovery Channel documentary called "The Other Side of Outsourcing: Who Really Wins?," the growth of jobs in these countries has the potential to make the world a safer and more stable place, bringing wealth and economic freedom to workers who may otherwise have been the disaffected poor most vulnerable to terrorist recruiting efforts.

Regardless of the benefits, there remain calls for increased trade protectionism, which amounts to an inefficient subsidy for non-competitive sectors of the economy, and leads to higher prices for consumers and a lower rate of return for investors. Protectionism preserves jobs in less competitive sectors while destroying current and future jobs in sectors that have a competitive advantage. If barriers are erected to prevent offshore outsourcing, the overall effect will be not to create jobs but to destroy them.

For example, in March 2002, the U.S. imposed tariffs on steel to protect the American steel industry. In the U.S., steel users employ roughly 40 times more people than do steel producers. Thus, according to estimates by the Institute for International Economics, between 45,000 and 75,000 jobs were lost because higher steel prices made U.S. steel-using industries less competitive.

Most economists estimate that about 100,000 white-collar jobs annually have gone overseas in recent years -- for a total of about 300,000 jobs so far. To put these numbers in context, begin with the overall size of our huge labor force, over 139 million jobs. Then consider that the American economy creates and eliminates 30 million jobs each year.

White-collar job losses in high-tech industries in the past three years were mostly attributable to the unsustainable high-tech bubble -- not offshore outsourcing. The collapse of venture capital investments by over 80 percent at the beginning of this decade had far more to do with high-tech job losses.

The U.S. is only now emerging from the "jobless recovery" that has been unfolding since 2001 and the great American job-creation machine is reawakening.

Much of the new job creation is due to foreign direct investment. The number of jobs created by foreign direct investment in 2002 was worth $80 billion more than U.S. direct investment abroad.

Convergys is aware that the benefits of trade may appear as abstract statistics, while the costs are personal. The costs affect real people who lose their jobs through no fault of their own. That is why Convergys tries, whenever possible, to cushion the impact of the change, providing separation assistance and retraining to enable workers to move into new, rewarding jobs.

The statistical evidence about the benefits of trade and offshore outsourcing is compelling. Offshore outsourcing and free trade reduce both prices and costs, while spreading new technology, new practices, and new job-creating investment globally.

The cost savings generated by shifting routine computer programming, back-office, and call center jobs overseas can generate new capital to finance creation of new, higher-wage jobs here in the United States.

The need for software engineers, network administrators, systems managers and related IT software professionals grows as routine jobs are outsourced, according the Bureau of Labor Statistics. That is why America gained 90,000 more IT jobs last year than it lost to outsourcing -- and reduced costs by nearly $7 billion.

According to the McKinsey Global Institute, for every dollar spent on outsourcing overseas, the U.S. economy recovers $1.13 in such benefits as cost savings, new revenues, repatriated earnings, and redeployed labor.

Offshore outsourcing also provides access to a tremendous pool of highly skilled talent around the world -- skills that are in high demand but often in short supply in the U.S. The number of technicians, engineers, and scientists being trained overseas is staggering -- all of which points to the critical need to compete in a global economy.

A recent poll commissioned by the Business Roundtable shows that Americans understand the benefits of employers engaging in a global marketplace. They understand that doing so is essential for sustained growth and the creation of jobs for American workers.

More than nine out of ten respondents said that American companies should take charge of the global marketplace through innovation and by entering new markets. And three out of four would want companies to engage in a worldwide economy unrestrained by government regulation.

Convergys believes Federal and state tax policies should emphasize incentives for new investments and expanded research so that U.S. industries continue to be world leaders.

The current federal tax credit for R&D -- an important incentive for innovation -- is not permanent. Convergys has called on Congress to extend the tax credit and consider making it permanent.

Further, the U.S. should eliminate the competitive disadvantages our businesses face because of the double taxation of corporate income, and the disincentive for individual investors because of the alternative minimum tax. Because our trading partners rely on value-added and other indirect taxes -- and far less on corporate income taxes -- our businesses carry a heavier tax burden on exports.

America also needs to overcome our self-defeating reluctance to enter into free trade agreements, and launch a broad campaign to negotiate and sign bilateral, regional, and multilateral trade agreements with everyone we should be doing business with.

The U.S. needs many more open markets, not fewer. We have to get over the fear that free trade is a zero-sum game in which we will lose by opening up both our markets and those of our trading partners.

We live in an increasingly global economy and should push America's trading partners to stimulate their economies, relieve their businesses of excessive regulatory burdens, and avoid policies that keep their currencies artificially weak. Stronger performance by our trading partners would help cut our widened trade deficit caused primarily by lower demand from their sluggish economies.

The ultimate success of today's massive restructuring of our economy and labor force depends foremost on our ability to educate and train American workers.

It will take our best efforts at all levels of education to provide everyone with the flexible skills needed for the increasingly complex jobs of the future.

There are simply fewer and fewer purely "blue-collar" jobs. The jobs that once took a steady hand and little experience today require everything from mathematical problem-solving to communications and team-building skills that only strong educational and training programs can provide.

This new economy requires a vastly better national educational effort -- from pre-kindergarten to graduate schools and mid-career training and retraining programs -- to keep pace with changing job requirements.

Convergys recognizes this need and supports efforts to expand university engineering and science programs to reverse the decline in degrees granted in those fields. In engineering alone, China's universities have awarded 195,000 bachelor degrees, European countries awarded 135,000, and the U.S. awarded fewer than 60,000. Unless we reverse course, this gap will continue to increase.

We are also solidly behind the initiative to double the number of workers receiving job training in Federal programs.

Another possible tool to help calm the fears of those who feel threatened or are actually affected by offshore outsourcing is to expand the criteria under which the Trade Adjustment Assistance (TAA) program applies to displaced workers. Currently, workers cannot apply for TAA unless overall sales in their sector decline. In the case of offshore outsourcing, productivity increases allow for increased production and sales -- making TAA out of reach for those affected by offshoring. Reworking TAA rules is one way to take into account workers displaced by offshore outsourcing even when their industries or firms maintain robust levels of production.

While we can argue about proposals in other areas, we surely can agree that education and training reforms have to be critical parts of a solution.

The U.S. will not become more prosperous by isolating itself from a growing worldwide economy. Yet that is the course advocated by some.

The road to greater economic gain is to expand investment and innovation. Promote trade and boost economic growth worldwide. And improve education and training programs to help workers develop skills for the jobs of today -- and the jobs of tomorrow.

The basic conditions for job recovery are in place and are now happening -- the economic signs are positive -- so we must continue to stay the course, and not cede to these isolationist and protectionist demands.

Convergys' goal is to compete with the world's best workers -- so that we create good jobs and long-term prosperity.

The key question in the worldwide competitive sourcing debate is "How do companies continue to grow, innovate and develop new products and services while creating jobs in the global marketplace?" The answer for Convergys is to continue to anticipate and be responsive to the needs of our clients around the world. Ultimately, this approach benefits not only those customers/ clients and our shareholders, but most importantly, Convergys' most valuable resource -- our more that 55,000 employees.

I believe, if you have the knowldge and skills for the job, even you are american or non american, that you are qualified for the job even it is in foreign country.
Outsourcing for me is OK. If my country will be needing more skilled person, then I will support it.

I have a paper to do on this topic and I was wanting some pros and cons on this subject. I dont know much about it. Please help.